2007

The following items appeared in 2007.

October 2007

The following articles appeared in October 2007.

Monday, October 01, 2007

Employee Ownership Blog – Why?

Why, you may be asking yourself, do we need an employee ownership blog? There are blogs out there dedicated to ESOPs and employee ownership and they are doing a good job of discussing the topic. Why one more?

Well, why not one more? We’ve been saying for years how important it is to foster discussion about employee ownership and how it will make American businesses better, more successful and now we’re heeding our own advice. This blog is dedicated to spreading the message about employee ownership and we know the best way to spread that message is to get our members talking.

Let’s start the discussion with a question that is asked frequently, why are there not more ESOP companies? A recent study on repurchase obligation commissioned by the Employee Ownership Foundation and done by the National Center for Employee Ownership, tried to answer this very question. One theory is that the number of ESOPs established in a given year is about the same as the amount that are also terminated, thus keeping the number stagnant. We wondered how repurchase obligation played out in this scenario. It turns out that while repurchase obligation is a factor for some companies, the reason most companies terminate the ESOP is because of an offer to buy the company that is too good to turn down. If you are interested in reading the full study, click here – ESOP Termination Phase 1: A Report on the Reason Companies Terminate ESOP Plans.

Is your company struggling with repurchase obligations? What are you doing?

Monday, October 08, 2007

Employee Ownership Month – What are you doing?

October is Employee Ownership Month, the celebration of the incredible spirit of employee ownership. For almost 20 years, the employee ownership community has been celebrating with company picnics, roundtable discussions, and activities to increase team work. It’s an opportunity to educate employee owners about the benefits of ESOPs and a time to educate elected officials and the public as to why employee ownership through ESOPs is good policy.

What will you be doing this month? Drop us a line and let us know how you celebrate Employee Ownership Month.

Thursday, October 11, 2007

Segregated Accounts Question from Reader

With the implementation of Segregated Accounts, is there a fiduciary responsibility to fund the SIA account sooner, since terminated participants no longer have a Capital Stock Account and the benefit derived from Capital Stock growth? Regardless of the OIA/SIA investment mix, should that discretionary contribution be funded so the invested assets are employed 12 months of the subsequent year rather than the 7-8 months following completion of the annual administration? A short term investment could be made until the aggregate Diversification, Termination, and Retirement Distributions are calculated.

What are your thoughts?

Tuesday, October 16, 2007

ESOP Association President Discusses Employee Ownership and ESOPs

J. Michael Keeling, President of The ESOP Association, recently appeared on Conversations with Harold Hudson Channer, a public access cable television series in New York City, to discuss employee ownership in America.

Mr. Channer has been hosting Conversations for over 30 years and has interviewed both Dr. Louis O. Kelso and Former Senator Russell Long. For additional information about Conversations with Harold Hudson Channer, visit www.channer.tv.

Friday, October 19, 2007

Three ESOP Association Members Named 2007 Top Small Workplaces

Three members of The ESOP Association have been named among the Top 15 Small Workplaces. Congratulations to Phelps County Bank of Rolla, MO, Reflexite of Avon, CT, and Restek Corporation of Bellefonte, PA. This is the first annual list of the best small businesses in the U.S. which was compiled by The Wall Street Journal and Winning Workplaces, a nonprofit group which provides consulting services to small businesses.

On October 1, 2007, the winners were featured in a special small business section of The Wall Street Journal in print and online. To qualify, companies need to employ 500 or fewer individuals and have revenues of $200 million or less. The winners were chosen based on their success in creating a culture fostering professional growth opportunities, and unique benefits. For more information about the Top Small Workplaces project, visit www.wsj.com/smallbusiness or www.winningworkplaces.com.

Research on employee owned companies has found the ESOP companies are high performing, have high employee retention rates, and workers that are more productive and motivated.

What makes your company unique and a great place to work?

Thursday, October 25, 2007

House Ways and Means Committee Proposes Cutback in Benefits of Stock Options in S ESOP Companies

The following is a Legislative Alert that was sent to members of The ESOP Association today.

While precise legislative language is not available at this time, a summary of legislation introduced today by Chair of the House Ways and Means Committee, Charles Rangel [D-NY], has as a so-called loophole closer, a provision that impacts an S ESOP corporation’s granting stock options to employees. Note, the proposal does not impact the underlying tax treatment of the S corporation’s taxable income pro rated to the ESOP’s ownership share.

This alert contains the best information on the proposal at this time below.

The Board of Directors of The ESOP Association, of which all corporate members are S ESOP companies, will immediately begin a review process of the proposal to fine tune the Association’s posture to the Congress about this proposal. It will supposedly raise $600 million over ten years, or a mere $60 million per year, in order to help pay for a near $400 billion reduction in corporate income taxes due to a proposed rate cut in the C corporation current rate of 35% to 30.5%, a proposal initiated by the Administration. Note the Treasury Department recommended a proposal in August that would have eliminated all ESOP tax benefits to raise $23 billion over 10 years.

“The ESOP Association’s historical posture is to be aggressive in protecting ESOP law and ESOP companies, as one set back often emboldens ESOP cynics to seek more ESOP cutbacks later,” said ESOP Association President and Chief Staff Officer Michael Keeling. “As noted when the Treasury Department recommended doing away with all ESOP tax benefits to pay for a corporate rate reduction in the name of making America more competitive, it is ludicrous to cut back on a program—employee ownership through ESOPs—that has proven to more often than not create a high performing, competitive company that is fair to employees. On the other hand, we are pleased that the Democratic leadership of Ways and Means did not endorse the more anti-ESOP proposal embedded in the Treasury Department recommendation in August.”

The ESOP Association will work with its ESOP friends on the Committee, both Democrat and Republican, to be sure misguided proposals that hurt ESOP companies are not part of some false concept that ESOPs do not help U.S. companies be more competitive.

The language from the proposal is below. When more information is available, it will be shared with Association members.

Recognition of ordinary income on exercise of stock options in S corporation with an ESOP. Under current law, an individual that holds an option in an S corporation is not subject to tax on the income of the S corporation until such individual exercise their option and becomes a shareholder in the S corporation. During the period of time in which an individual holds an option in an S corporation, taxes on the income earned by the S corporation are intended to be paid by the other shareholders in the S corporation. However, a portion of the S corporation’s earnings will never be subject to tax if one of the shareholders in the S corporation is a tax-exempt employee stock ownership plan (an “ESOP”). Certain taxpayers have taken advantage of these aspects of current law by having a tax-exempt ESOP hold a significant percentage of an S corporation’s stock while taxable individuals hold stock options. The combined effect of this structure is that taxable investors are able to benefit from appreciation in the value of the S corporation while a significant portion of the S corporation’s income completely avoids tax. The bill would require these option holders to recognize income when an option is recognized or sold in an amount equal to the amount of income that was shifted to the ESOP through this type of tax planning during the period of time that the option was held buy such taxpayer. Interest will be assessed at the underpayment rate on any amounts included under this provision. This proposal is estimated to raise $606 million over 10 years.

Friday, October 26, 2007

Legislative Language of ESOP Proposal Revealed

The following is a Legislative Alert that was sent to members of The ESOP Association today.

Section 3701 of HR 3970, by Congressman Charles Rangel, is the ESOP S Corp provision about which we wrote to you yesterday. You can read this provision and the entire bill by going on the Ways and Means website, and clicking on the left hand side, under Hot Topics, the live connection to the language of HR 3970, which is labeled as “HR 3970, The Tax Reduction and Reform Act of 2007.” The Ways and Means site can be accessed from the Association’s website under government affairs, menu item capital links, U.S. House of Representatives, or directly at http://waysandmeans.house.gov/MoreInfo.asp?section=34.

Please note, the provision defines as an option any interest that is the same as what is defined as synthetic equity in IRC 409(p)(6)(C). The new tax provision would apply to options granted after the date of enactment.

There is strong opposition to the entire bill, and enactment would be no earlier than some time in 2008, or perhaps even later, if ever.

Again, the leadership of the Association is reviewing the proposal in detail to determine the Association’s position on behalf of its members. The provisions definition of what is a stock option is broad.

November 2007

The following articles appeared in November 2007.

Friday, November 02, 2007

Economic Performance of ESOP Companies

We’ve always said the economic performance of ESOP companies surpassed that of non-ESOP companies, in fact, we have results to prove it. In 2007, over 89% of ESOP companies responding to an annual survey conducted by the Employee Ownership Foundation stated that the ESOP was good for business. The same can be said for the last few years with corresponding numbers respectively at 91% in 2006, 87.5% in 2005 and 88% in 2004.

While we know that comparing the performance of an ESOP companies stock to that of the stock market is an apples and organs comparison, but we find it to be a good indicator of performance. In 2007 41% stated that the company did better than three indices, the Dow Jones Industrial Average, S & P 500, and the NASDAQ.

· 82% indicated that revenue increased; 18% indicated that revenue did not increase

· 72% indicated profitability did increase; 28% indicated that profitability did not increase

· 68% of survey respondents indicated that the ESOP improved the overall productivity of the company’s employees

· 47% of companies that responded indicated that they have created an employee participation program since establishing the ESOP

These results are impressive but what do they mean for our community. Do ESOP companies perform better because of the ESOP or are there other factors at play?

Monday, November 12, 2007

Employee Ownership Overseas – Greater Participation?

First, before we even begin this discussion, yes, we know that employee ownership schemes in foreign countries do not work as they do here at home. But for the purposes of this discussion, let’s assume they are similar.

According to the European Federation of Employee Share Ownership’s (EFES) website, http://www.efesonline.org/, a recent European Commission Study found that 89% of all 2,000 widest European Groups (which encompasses 29 millions employees) have employee share ownership. The study also found that another 83% of these Groups have plans to develop it further. The EFES says that these Groups consider employee share ownership to be one of the best ways to align the interests of employee and shareholders, a way to motivate employees, and improve corporate performance. On the other hand, people familiar with Western Europe point out shared capitalism programs in these nations lead to result in less than 10% of a company’s shares being held by employees.

In the US, studies show that almost 50% of the individuals working in the private sector are involved in some sort of shared capitalism program. While that figure is quite high, it is still very minor when compared to the European figures.

Let’s look at the productivity factors: The Economic Performance Survey, which is conducted each year by the Employee Ownership Foundation, found in 2006, that 68% said that the ESOP has affected the productivity of employees overall and 91% stated that the creation of the ESOP was a good business decision for the company.

If we really believe this, why are there not more ESOP companies in the US?

Thursday, November 15, 2007

2007 Las Vegas Conference & Tradeshow – What’s the Buzz?

Another Las Vegas Conference and Tradeshow has come and gone. This year’s event, which was held at the Venetian hotel, was the highest attended conference of ESOP advocates in history, with approximately 1,230 attendees and 31 exhibitors in the tradeshow.

Two weeks prior to the conference, H.R. 3970, the Tax Reduction and Reform Act of 2007, was introduced by Congressman Charles Rangel. We overheard many people discussing the implications of the new legislation and it was on the agenda of all the ESOP Association Advisory Committees as well as a topic discussed by ESOP Association President J. Michael Keeling at the luncheon on the final day of the conference.

What did you find to be the hot topic of this year’s conference?

Tuesday, November 27, 2007

Prominent Harvard University Economics Professor Calls for Government Promotion of Shared Capitalism, Including ESOPs in His Book

Professor Richard B. Freeman, Chair of the Economics Department at Harvard University and Director of the Labor Studies Program at the National Bureau of Economic Research, in his book, America Works: Critical Thoughts on the Exceptional U.S. Labor Market, discusses the need for the establishment of a federal agency to promote more shared capitalism in America. As defined by Professor Freeman, shared capitalism includes increased profit sharing and employee stock ownership. This proposed new federal agency would essentially gather information, publicize best practices, and assist firms that choose to participate in shared capitalism programs as described by Dr. Freeman in his book. More information about Dr. Freeman’s idea can be found in his book on page 146.

Statistics on shared capitalism were released earlier this year by the Employee Ownership Foundation. The data was collected from a series of questions on the General Social Survey (GSS), which is the premier survey of social data in America. The GSS is administered annually to a national sample of working adults and is funded primarily by the National Science Foundation and conducted by the National Opinion Research Center at the University of Chicago. The series of questions on shared capitalism were asked in 2002 and will again be included on the survey in 2007. Here are a few findings:

· Out of 114 million people in the U.S. who work in the private sector, 17.5% of employees own company stock, about 20 million employees, and 9.3% hold stock options, approximately 10 million employees.

· The number of employees who reported profit sharing, gainsharing, owning company stock or holding stock options was 46.7%, which is an increase over the 2002 GSS finding of 43.1%.

· While the data reflect a slight drop from the 2002 results which showed that 21.2% of employees owned company stock and 13.1% held stock options, the numbers are still impressive when one takes into consideration that almost 50% of the individuals working in the private sector are involved in some sort of shared capitalism program.

If so many Americans are involved with shared capitalism programs in the US, why are we, meaning our elected officials, candidates for President, business writers, schools and universities, and social commentators, not talking about it? There have been discussions about building an ownership society in this country, but, unfortunately, nothing became of it. Even now you can find a few idyllic quotes about an ownership society and what it would mean but that seems to be as far as it goes.

Would a government agency to promote shared capitalism really help to create an ownership society?

December 2007

The following articles appeared in December 2007.

Tuesday, December 04, 2007

Should S ESOPs Care About Proposed S ESOP Law Change?

A message from ESOP Association President, J. Michael Keeling.

Ever since the Chair of the House Ways and Means Committee Congressman Charles Rangel

(D-NY) introduced H.R. 3970, the “Tax Reduction and Reform Act of 2007”, containing Section 3701, which would create a new Internal Revenue Code Section 409B, the ESOP community seems to be yawning, saying “So what”.

Well, maybe I exaggerated; but compared to the legislative threats against ESOPs in the 80s and early 90s, the interest of ESOP company leaders in proposed IRC §409B seems very lukewarm.

We have to ask ourselves why? This question is certainly relevant to ask S ESOP company leaders.

(To explain to those not following legislative development, proposed IRC 409B would put very punitive taxes on persons holding what is called “synthetic equity” in an S ESOP company. Go to www.esopassociation.org for explanations under Hot Topics, and Advocacy Kit.)

Here is what I am hearing.

One, I hear S Corp leaders say, “We do not have any synthetic equity in our S ESOP company, so why should we care?”

From my vantage point, having lobbied for good ESOP laws for over 25 years, there are both specific reasons for S ESOP companies to contact their Representatives, and general reasons for all ESOP Association members, not just our 900 S ESOP company members, to contact their Representatives to try to prevent proposed IRC§409B being endorsed by the House Ways and Means Committee.

Let me explain my view:

Even if an S ESOP company currently has no deferred compensation program tied to share value, or is “grandfathered” what if after proposed IRC §409B became law, the S ESOP company’s CEO dies, or the CFO quits, or the COO is terminated, and the S ESOP company leadership has to hire a replacement.

It is in the best interest of all the employee owners, by the way, to hire the best available person, paying what is expected to the person compared to what other employers pay for similar positions.

Let’s assume a promising young women CFO is a candidate. Let’s assume another corporation of similar size in the region also want to hire her.

The non S ESOP company can offer a good salary, an ERISA plan that defers the 415 amount of around $46,000, plus deferred compensation that might vest in five years that is tied to the company’s share value, such as a SAR, a stock option, a warrant, or bonus based on share value increases, etc.

If proposed §409B is law, the S ESOP cannot offer such a package. Oh yes, it could, if the economy co-operates and the S ESOP company has good cash flow, pay more in current compensation, or promise big annual bonuses; but, you know what, making big promises for big cash payments before someone takes the job is risky, because no matter how good a person looks on paper, until she is actually on the job, her suitability is not known, and predicting future cash flow is an art, not a science. Ask a home builder what s/he thought cash flow would be in 2008 in 2005, if you desire proof of my statement about cash flow projections not being certain.

In other words, under proposed §409B, the S ESOP is at a real disadvantage.

Do current S ESOP leaders want to tie their hands in hiring new executives compared to non S ESOP companies? I should think not.

But what is the big ESOP picture? What about those in the ESOP community that do believe in the Association’s Vision – that the number of employee owners through ESOPs grows and grows until a substantial majority of private sector employees are owners of the companies where they work?

One can surmise that enactment of proposed IRC §409B would be a bigger setback for the Association’s Vision than it is to individual S Corp ESOPs.

Why? Let me set forth reasons.

1. If the Ways and Means Committee approves proposed IRC §409B as introduced, it is an indication that the Democratic majority of the Ways and Means Committee view ESOP promotion laws suspiciously, and in need of “reform”.

2. If the Ways and Means Committee approves proposed IRC §409B as introduced, it is a clear indication that the Democratic majority of this most important Congressional Committee in Congress with regard to ESOPs is not interested at all in promoting, or expanding employee ownership through ESOPs.

3. If the Ways and Means Committee approves proposed IRC §409B as introduced, it is a clear indication that the Democratic majority of Ways and Means sees the ESOP community as weak, passive, and easy to attack in order to raise tax revenue to pay for tax beaks that the Democratic majority perceives as being for “good” guys in society, who have a more powerful voice in the nation.

4. Put 1, 2, and 3 together and the future for S ESOP law and C ESOP law is bleak as the Democratic majority of Ways and Means Committee would see no reason to favor ESOPs.

I hope the ESOP community does not sit on the sidelines while the Ways and Means Committee considers proposed IRC §409B.

My remarks are just my thoughts – they may be right; they may be wrong; they may be partially right; or they may be partially wrong.

Other thoughts are welcomed.

Wednesday, December 12, 2007

Media and ESOPs

Earlier this year the proposed sale of the Tribune Company to an ESOP set off a hailstorm of media activity. It ran the gamut from praise to suspicion about what an ESOP actually is. It would seem, and we’re sure this is not the first time you’ve heard this, that ESOPs have a love/hate relationship with the media. Each month there are articles discussing the fables of ESOPs, suspicions about tax dodging, and stories of employees losing everything when the company goes bankrupt because they were solely invested in ESOPs. No one needs a refresher on Enron.

Apart from the coverage of the Tribune Company’s sale, which has been more negative than positive, there are still some good positive articles out there, mostly appearing in small local papers and trade publications on taxes and retirement plans.

Many media outlets have blogs and discussion forums on their sites and reporters do lurk on the blogs and forums for story ideas. If you see a story, get chatting about what employee ownership has meant to you and your company. Be frank in your discussion of why the ESOP is important to you, your fellow employee owners, and your company. You might tempt a reporter with a story idea about ESOPs in your area.

Wednesday, December 19, 2007

Report on Reasons for ESOP Terminations Released

The Employee Ownership Foundation recently released a final report on the reasons why companies terminate ESOP plans. The report was completed in two phases and found that the most common reason for termination of an ESOP is acquisition of the ESOP company by new owners. The report was commissioned and funded by the Employee Ownership Foundation and conducted by the National Center for Employee Ownership in Oakland, CA.

Phase I of the report found that while the most common reason for termination may be acquisition, there is no one reason to explain ESOP termination. Thirty executives of former ESOP companies, who were well-known in the ESOP community, were interviewed in depth for Phase I and were asked about repurchase obligation (Repurchase obligation is a closely held company’s obligation to repurchase its stock from former ESOP participants and their beneficiaries.), acquisition offers, S corporation status, company size, percentage of ESOP ownership, and corporate performance to determine the reason for their companies’ ESOP termination. It is important to note that a very small sample of executives from ESOP companies were interviewed for Phase I of the survey as companies that have terminated ESOPs and/or were acquired are difficult to track. This small number of companies brings into question the validity of the Phase I statistics; in any event, Phase I finding are:

· 17% of acquired companies said that repurchase obligation was one of the primary reasons the ESOP was terminated; another 28% said it was a important reason; 6% said it contributed to the decision; 6% said it played a minor role; and 44% said it played no role

· For 17% of companies that terminated the ESOP, repurchase obligation was the sole reason; another 17% said it was the primary reason; 33% said it was an important reason; 17% said it had a minor impact; and 17% said it played no role

Phase II of the report was conclusive that an attractive acquisition offer was the primary reason for ESOP termination. Phase II of the report surveyed service providers to ESOP companies at ESOP advisory firms and large plan administrators. From the files of these service providers, data from 455 ESOP plan terminations was analyzed and revealed:

· 51.2% of the companies could handle repurchase obligation but received an attractive acquisition offer that was too good to turn down

· 15.6% were dissatisfied with the ESOP for reasons other than repurchase obligation

· 13.2% of companies were doing well financially but could not manage their repurchase obligation or did not expect to do so in the future

While repurchase obligation is an ongoing issue for ESOP companies, according to Phase I of this report, about 85% of the terminations were in response to an offer “too good to refuse” as the price offered for shares was very lucrative. Clearly, employee participants in these cases received significant money for their retirement security.

Immediate Past Chair of The ESOP Association Steve Voigt, CEO of the King Arthur Flour Company in Norwich, VT, a 100% S corporation ESOP, commented on the survey’s findings saying, “The research is a great jumping off point. I encourage the two ESOP Association Directors and Trustees Retreats in 2008 to explore the key drivers of ESOP sustainability including: Board understanding of and commitment to ESOPs, their success in developing 2nd generation ESOP management, and repurchase obligation. If the ESOP community continues to explore key drivers of ESOP sustainability our country stands to gain many benefits, not least of which is long-term wealth creation for employee owners.”